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HE TRATEGY AND ACTICS OF RICING T S T P QWerty On KAT For more Fifth Edition The Strategy and Tactics of Pricing A GUIDE TO GROWING MORE PROFITABLY Thomas T. Nagle Monitor Group John E. Hogan Monitor Group Joseph Zale Monitor Group Editorial Director: Sally Yagan Editor in Chief: Eric Svendsen Acquisitions Editor: James Heine AVP/Executive Editor: Melissa Sabella Director of Marketing: Patrice Lumumba Jones Marketing Manager: Anne Fahlgren Marketing Assistant: Melinda Jensen Project Manager: Renata Butera Operations Specialist: Renata Butera Creative Art Director: Jayne Conte Cover Designer: Margaret Kenselaar Full-Service Project Management: Nitin Agarwal Composition: Aptara®, Inc. Printer/Binder: Courier, Westford Cover Printer: Courier, Westford Text Font: Palatino Credits and acknowledgments borrowed from other sources and reproduced, with permission, in this textbook appear on appropriate pages within text. Copyright © 2011, 2006, 2002, 1995, 1987 Pearson Education, Inc., publishing as Prentice Hall, One Lake Street, Upper Saddle River, New Jersey 07458. All rights reserved. Manufactured in the United States of America. This publication is protected by Copyright, and permission should be obtained from the publisher prior to any prohibited reproduction, storage in a retrieval system, or transmission in any form or by any means, electronic, mechanical, photocopying, recording, or likewise. To obtain permission(s) to use material from this work, please submit a written request to Pearson Education, Inc., Permissions Department, One Lake Street, Upper Saddle River, New Jersey 07458. Many of the designations by manufacturers and seller to distinguish their products are claimed as trademarks. Where those designations appear in this book, and the publisher was aware of a trademark claim, the designations have been printed in initial caps or all caps. Library of Congress Cataloging-in-Publication Data Nagle, Thomas T. The strategy and tactics of pricing / Thomas T. Nagle, John E. Hogan, Joseph Zale.—5th ed. p. cm. ISBN-13: 978-0-13-610681-4 ISBN-10: 0-13-610681-1 1. Pricing. 2. Marketing—Decision making. I. Hogan, John E., Ph.D. II. Zale, Joseph. III. Title. HF5416.5.N34 2010 658.8’16—dc22 2009047553 10 9 8 7 6 5 4 3 2 1 ISBN 13: 978-0-13-610681-4 ISBN 10: 0-13-610681-1 BRIEF CONTENTS Chapter 1 Strategic Pricing Coordinating the Drivers of Profitability Chapter 2 Value Creation The Source of Pricing Advantage Chapter 3 Price Structure Tactics for Pricing Differently Across Segments Chapter 4 Price and Value Communication Strategies to Influence Willingness-to-Pay Chapter 5 Pricing Policy Managing Expectations to Improve Price Realization Chapter 6 Price Level Setting the Right Price for Sustainable Profit Chapter 7 Pricing Over the Product Life Cycle Adapting Strategy in an Evolving Market Chapter 8 Pricing Strategy Implementation Embedding Strategic Pricing in the Organization Chapter 9 Costs How Should They Affect Pricing Decisions? Chapter 10 Financial Analysis Pricing for Profit Chapter 11 Competition Managing Conflict Thoughtfully Chapter 12 Measurement of Price Sensitivity Research Techniques to Supplement Judgment Chapter 13 Ethics and the Law Understanding the Constraints on Pricing CONTENTS Preface Chapter 1 Strategic Pricing Coordinating the Drivers of Profitability Cost-Plus Pricing Customer-Driven Pricing Share-Driven Pricing What Is Strategic Pricing? Value Creation Price Structure Price and Value Communication Pricing Policy Price Level Implementing the Pricing Strategy Summary • Notes Chapter 2 Value Creation The Source of Pricing Advantage The Role of Value in Pricing How to Estimate Economic Value Competitive Reference Prices Estimating Monetary Value Monetary Value Estimation: An Illustration Estimating Psychological Value Psychological Value Estimation: An Illustration The High Cost of Shortcuts Value-Based Market Segmentation Step 1: Determine Basic Segmentation Criteria Step 2: Identify Discriminating Value Drivers Step 3: Determine Your Operational Constraints and Advantages Step 4: Create Primary and Secondary Segments Step 5: Create Detailed Segment Descriptions Step 6: Develop Segment Metrics and Fences Summary • Notes Chapter 3 Price Structure Tactics for Pricing Differently Across Segments Price-Offer Configuration Optimizing an Offer Bundle Designing Segment Specific Bundles Unbundling Strategically Price Metrics Creating Good Price Metrics Performance-Based Metrics Tie-Ins as Metrics Price Fences Buyer Identification Fences Purchase Location Fences Time of Purchase Fences Purchase Quantity Fences Summary • Notes Chapter 4 Price and Value Communication Strategies to Influence Willingness-to-Pay Value Communication Adapting the Message for Product Characteristics Adapting the Message to Purchase Context The Buying Process Multiple Participants in the Buying Process Price Communication Proportional Price Evaluations Reference Prices Perceived Fairness Gain–Loss Framing Summary• Notes Chapter 5 Pricing Policy Managing Expectations to Improve Price Realization Policy Development Policies for Responding to Price Objections The Problem with Ad Hoc Negotiation The Benefits of Policies for Price Negotiation Policies for Different Buyer Types Policies for Dealing with Power Buyers Policies for Managing Price Increases Policies for Leading an Industry-Wide Increase Policies for Transitioning from Low One-Off Pricing Policies for Dealing with an Economic Downturn Policies for Promotional Pricing Summary • Notes Chapter 6 Price Level Setting the Right Price for Sustainable Profit The Price-Setting Process Defining the Price Window Establishing an Initial Price Point Pricing Objectives Defining the Price-Volume Trade-off Estimating Consumer Response Communicate New Prices to the Market Summary • Notes Chapter 7 Pricing Over the Product Life Cycle Adapting Strategy in an Evolving Market New Products and the Product Life Cycle Pricing the Innovation for Market Introduction Communicating Value with Trial Promotions Communicating Value with Direct Sales Marketing Innovations Through Distribution Channels Pricing New Products for Growth Pricing within a Differentiated Product Strategy Pricing within a Cost Leadership Strategy Price Reductions in Growth Pricing the Established Product in Maturity Pricing a Product in Market Decline Alternative Strategies in Decline Summary • Notes Chapter 8 Pricing Strategy Implementation Embedding Strategic Pricing in the Organization Organization Organizational Structure Decision Rights Pricing Processes Motivation Customer Analytics Process Management Analytics Performance Measures and Incentives Managing the Change Process Senior Management Leadership Demonstration Projects Summary • Notes Chapter 9 Costs How Should They Affect Pricing Decisions? The Role of Costs in Pricing Determining Relevant Costs Why Incremental Costs? Why Avoidable Costs? Avoiding Misleading Accounting Estimating Relevant Costs Activity-Based Costing Percent Contribution Margin and Pricing Strategy Managing Costs in Transfer Pricing Summary • Notes Chapter 10 Financial Analysis Pricing for Profit Break-even Sales Analysis: The Basic Case
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